What self-taught investors should know before putting money into mutual funds Knowing terms is important


August 23, 1992|By WERNER RENBERG

"I'm at a loss," a reader writes. "I am a 24-year-old full-time college student, full-time worker, and I don't know where to turn.

"Over the past 16 months, I've managed to save about $8,000. I now am at a point where I want this money to work for me rather than sit in a safe. Any additional savings I can add, I will."

The student goes on to say that he knows no one in the securities business. And he's hesitant to ask someone he does not know for advice about handling the money. So he has tried to teach himself by reading daily newspapers and other periodicals.

But as he read, questions occurred to him. They may have occurred to you, too -- whether you're in your 20s or older.

* "Do I want total returns or yield?"

Total return, a measure of mutual fund performance, reflects the rate at which a fund's net asset value (NAV) has risen or fallen during a given period, plus any income dividends and capital gains distributions-- both of which are assumed to have been reinvested -- that were paid during the period.

Yield is the annual rate at which a fund has distributed to its shareholders the income it has received from the securities it owns.

Whether you're investing for growth or for income, total return is the most important measure of a fund's performance.

If you are investing for growth and don't want taxable income, you may prefer to go for a superior low-yield fund -- one that invests primarily in growth stocks that pay low dividends, if any.

If you are investing for income, you will want to know the yield, but don't focus on it alone. The yield may mislead you.

A fund may report a high yield because it owns risky securities, such as junk or foreign bonds. If their prices decline, the NAV would decline, too. In such a case, total return would fall below yield. If the fall was steep enough, total return could turn negative.

* "If there's a swing in the market, how easily can I move my money?"

It's easiest when you move from fund to fund within a family that permits telephone exchanges. You just call to request an exchange. It's almost as easy if you have to make a written request.

Moving from one fund family to another requires a request to redeem shares, waiting a few days for the check and sending a check to the new family. Wire transfers of money also may be used.

Moving individual retirement account (IRA) investments from one fund family to another can be made easier via a procedure known as a trustee-to-trustee transfer. Just ask Fund Family A, to which you want to switch, to request the money from Family B, which you want to leave.

Before making any move on the basis of "a swing in the market," think through whether it's really in your best long-term interest.

* "If I do move to another fund, am I taxed?"

When moving non-IRA money from one stock or bond fund to another, you will realize a taxable capital gain if the shares you're selling are worth more than they cost. If they are worth less, you have a capital loss that can offset capital gains or, within limits, other income.

When switching IRA assets, you don't need to worry about taxes, unless you run afoul of the rule for "rollovers," in which you handle the money yourself, that requires you to move it within 60 days.

* "Where do I go to start a portfolio with someone I can trust?"

Trust yourself. Decide whether your investment objective is growth, income or both. That will dictate whether you ought to be in stock funds (for growth), bond funds (for income) or balanced funds that own both stocks and bonds. Then do the research necessary to familiarize yourself with such funds by reading prospectuses and shareholder reports. You can get them from families such as Fidelity (800) 544-8888, T. Rowe Price (800) 638-5660, Scudder (800) 225-2470 and Vanguard (800) 662-7447.

If your objective is growth, you may wish to moderate the risk in

equity funds by putting a portion of your money into a bond fund. This may reduce your portfolio's total return -- but not all the time. As the table indicates, falling interest rates have caused the Salomon Bros. Broad Investment-Grade Bond Index to outperform the Standard & Poor's 500 Composite Stock Price Index, on the average, for the last five years.

If you want income, protect yourself against inflation and provide for some growth by putting a portion of your money into a stock fund. At today's levels, interest rates have less room to fall -- and, thus, bond funds offer less opportunity for gains -- than they did not long ago. Of course, one day inflation may rise again, causing interest rates to reverse course and bond funds to slip.

1992 Werner Renberg

How returns differ by type of fund

For periods ended June 30, 1992

.. .. .. .. .. .. .. .. .. .. .. .. ..Annual rate of return

.. .. .. .. .. .. .. .. .. .. ..10.. .. .. .. ..5.. .. ..1

Fund.. .. .. .. .. .. .. .. ..years.. .. .. ..years.. . year

Money Market Mutual Fund.. .. 7.5%.. .. .. .. 6.9%.. .. 4.4%

Salomon Bros. BIG Bond Index. 13.7%.. .. .. .10.6%.. ..14.2%

Lipper Balanced Funds Index ..14.9%.. .. .. ..8.0%.. ..13.8%

S&P 500 Index.. .. .. .. .. ..18.4%.. .. .. ..9.7%.. ..13.4%

Russell 2000 Index.. .. .. .. 13.7%.. .. .. ..4.8%.. ..14.5%

Money Market Mutual Fund.. .. .3.8%.. .. .. ..4.3%.. .. 3.1%

BIG=Broad Investment Grade

SOURCES: Lipper Analytical Services; Frank Russell Co., Salomon Bros., Standard & Poor's, U.S. Bureau of Labor Statistics.

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